The IRS has continued with their system of guidance by FAQ, this time effectively overriding the plain language of a question on page one of Form 1040 by adding a new question to the frequently asked questions (FAQ) page on the IRS website dealing with virtual currencies.[1]

The IRS added a question to the front page of Form 1040 that asked “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The initial draft of the instructions for Form 1040 indicated that a purchase of a virtual currency during the year would require a yes answer—which seems like the correct answer given that trading cash for a virtual currency would seem to be the textbook case for obtaining a financial interest in the virtual currency.

The IRS issued updated guidance for the 2020 version of the employee retention credit in Notice 2021-20,[1] taking into account modifications made to the program by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 signed into law on December 27, 2020.

This guidance is limited to the 2020 version of the ERC, and does not take into account changes that took effect on January 1, 2021. The Notice provides:

The guidance provided in this notice addresses the employee retention credit as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021. This notice does not address the changes made by section 207 of the Relief Act that apply to the employee retention credit for qualified wages paid after December 31, 2020. The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) will address the modifications made by section 207 of the Relief Act applicable to calendar quarters in 2021 in future guidance.[2]

The bill must still clear the Senate and be signed into law, but the House has now passed the American Rescue Plan of 2021.[1] The bill has 592 pages of material which, while far shorter than the year end Comprehensive Appropriations Act, 2021, is still a very substantial bill with a number of tax and non-tax provisions.

The Journal of Accountancy published two articles on the bill as passed by the House, one discussing tax-related provisions in the bill[2] and the other discussing other business related provisions.[3]

A taxpayer found a way to maximize benefits in an extreme way in an American Express credit card rewards program, so much so that the IRS looked to impose a tax on the gains in the case of Anikeev v. Commissioner, TC Memo 2021-23.[1] But the Tax Court found that the IRS’s years of informal guidance created a situation where most of the benefits were not taxable—at least not in the way the IRS was attempting to tax the benefits in the case.

The IRS has provided relief to taxpayers impacted by winter storms in Texas, pushing back the general return due date from April 15, 2021 to June 15, 2021.[1] As well, the relief will be extended to other states that receive similar disaster declarations by the Federal Emergency Management Agency (FEMA).

Debra Jean Blum filed a lawsuit that clearly dealt with physical injuries she sustained, but which she claimed her attorneys had bungled—so she then filed suit against the law firm. This dispute was settled out of court, and Debra sought to claim that this settlement was excludable from income as damages received on account of personal physical injuries under IRC §104(a)(2).[1]

In the case of San Jose Wellness v. Commissioner, 156 TC No. 4[1] the Tax Court again looked at the question of whether the bar on deductions other than cost of sales for marijuana dispensaries goes beyond just those allowed by IRC §162, and extends to deductions allowed under IRC §171 (charitable contributions) and §167 (depreciation). But the opinion looks at some interesting interpretations of language that may find application outside of cannabis industry cases.

Eight Democratic members of the House Ways & Means Committee penned a letter to IRS Commissioner Charles Rettig on February 18, asking that the due date again be extended beyond April 15 this year.[1]

A number of tax professionals had been reporting in early February that clients had been receiving notices from the IRS that the agency did not show that they had filed a 2019 tax return. In such cases a return had been filed, with most reporting the return had been filed electronically and accepted by the IRS.

The IRS has now come forward with a release on their website[1] that indicates that these erroneous notices should be ignored if a taxpayer actually filed their 2019 tax return.

Another taxpayer had a bad experience with his failure to properly report all of his foreign accounts on his annual FBAR filing in the case of United States v. Collins.[1] The Court found no issue with the IRS’s assessment of penalties on the willful failure to file reports on these accounts for 2007 and 2008, despite the taxpayer’s attempt to argue that he had acted reasonably in failing to report these accounts and the amounts of the penalty were excessive.

Penalties the IRS Sought to Impose

The IRS was proposing civil penalties of $154,032 for 2007 and the same amount for 2008 for willful failure to report these accounts on the FBAR filings for the years in question. The IRS did not impose the maximum penalties (50% of the highest balance for each year) nor even an amount as high as their internal mitigation document suggested Mr. Collins would qualify for. As the opinion notes:

20. Under this internal mitigation guidance, the IRS would have assessed civil FBAR penalties against Mr. Collins of: (a) $382,666 for his willful failure to report his foreign accounts on an FBAR for 2007; and (b) $233,462 for his willful failure to report his foreign accounts on an FBAR for 2008. (Pl.'s Ex. P42; Trial Tr. at 49:15–50:12.)

The Tax Court in the case of Complex Media Inc v. Commissioner[1] attempted to explain how it views the opportunity for a taxpayer to raise a substance over form argument in a tax matter.

The Doctrine and Why a Taxpayer Raising the Issue is Different

The substance over form claim argues that the transaction in question should not be evaluated based on the formal legal structure of the transaction, but rather the tax impact should be driven by the underlying substance of the transaction. The IRS raises this argument often when the government believes the transaction was structured in a manner that lacked any real economic substance, but was specifically chosen to achieve a specific tax objective.

The IRS has issued a warning to tax professionals that the agency is aware of a phishing scam that is aimed at obtaining various personal information.[1]

While the IRS published relief that sponsors could give to participants in their cafeteria plans in Notice 2020-29 for 2020 plan years, and the Congress provided additional relief in §214 of the Taxpayer Certainty and Disaster Relief Act of 2020, not all situations are eligible for relief that will make the participant whole. One such situation was discussed in IRS Information Letter 2020-0027.[1]

The letter was written to respond to a constituent of Rep. Madeleine Dean of Pennsylvania who found themselves out funds that had been directed by them into a dependent care flexible spending account in their employer’s cafeteria plan.

The final 1040 instructions seem to suggest that an “acquisition of a financial interest in a virtual currency” may not be an “acquisition of an interest in a virtual currency” in some cases for purposes of answering the first question to be answered on Form 1040 after the taxpayer’s identifying information and address. But the instructions don’t provide any information on how such non-acquisition acquisitions are to be identified.

In the final version of the Form 1040 Instructions[1] the IRS modified the list of reportable virtual currency transactions, eliminating certain items found in the December 31, 2020 draft version, but the question on the Form 1040 remained unchanged—and still suggests, at least to some, that the deleted items would still be reportable.

The COVID-related Tax Relief Act of 2020 Section 275 required the IRS to “clarify” that COVID-19 Protective Items used by an educator for the prevention of the spread of COVID-19 will qualify as an item allowed to be treated as an expense in calculating the above the line deduction (not in excess of $250) for qualified educators under IRC §62(a)(2)(D). In Revenue Procedure 2021-15[1] provides a safe harbor educators may use to claim these expenses.

The IRS has released guidance providing that certain information forms should not be filed that relate to items made tax exempt by the COVID-related Tax Relief Act of 2020,[1] as well as directing institutions that had already issued Forms 1099MISC related to payments made by the SBA on loans to file amended information returns[2] that contained an implied threat that those that fail to update those forms in a timely manner will face potential penalties.

The AICPA has sent a comment letter to the IRS regarding how to deal with the issue of claiming the 2020 version of the employee retention credit when payroll costs have been reported on a Paycheck Protection Program loan forgiveness application.[1]

Prior to the passage of the Taxpayer Certainty and Disaster Relief Act (TCDRA) of 2020, part of the Consolidated Appropriations Act, 2021, taxpayers who had received a Paycheck Protection Program loan were not eligible to claim the Employee Retention Credit enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, the December 27, 2020 law removed that restriction, providing instead that such a credit would not be available to be claimed for wages that were used to obtain forgiveness for a Paycheck Protection Program (PPP) loan.

During 2020 a number of states found themselves being faced with claims for unemployment that were fraudulent in nature. Perpetrators would use information they had obtained to claim to be another person, filing for unemployment in that person’s name and having the payment redirected to come to them. Some victims are just discovering this issue in January as they receive a Form 1099G from the state government showing that they had been paid unemployment compensation.

In News Release IR-2021-14[1] the IRS outlined steps for such individuals who have received information returns showing payment of unemployment compensation they never applied for to take.

The IRS announced a new electronic option for submitting Forms 2848 and 8821 online in News Release IR-2021-20.[1] The release describes the option as follows:

The Internal Revenue Service today rolled out a new online option that will help tax professionals remotely obtain signatures from individual and business clients and submit authorization forms electronically.

Tax professionals can find the new “Submit Forms 2848 and 8821 Online” on the IRS.gov/taxpros page. Tax professionals must have a Secure Access account, including a current username and password, or create an account in advance of submitting an online authorization form.

“This online tool will allow tax professionals to safely obtain signatures from individual and business clients and upload authorization forms,” said Chuck Rettig, IRS commissioner. “This is a first step in our ongoing efforts to expand digital options for tax professionals using electronic signatures and online uploads.”

The project is a result of the Taxpayer First Act that requires the IRS to expand use of taxpayers’ electronic signatures on authorization forms. This online option also will help protect taxpayers and tax professionals by more easily allowing remote transactions.[2]

The IRS has released a revised draft version of Form 7200[1] to be used to obtain a refundable payment of the employee retention credit and the qualified sick pay and family leave credit. The revisions include the first guidance on how employers will claim the advance employee retention credit for 2021.

The Taxpayer Certainty and Disaster Relief Act of 2020 §207(g)(1) revised CARES Act §2301(j)(2)(A) to provide for an advance payment of the employee retention credit to employers who did not employ more than 500 employees in 2019. The maximum credit is set at 70% of the employer’s average wages in 2019. A special rule allows for a modified computation for seasonal employers.[2]